Not All Revenue is the Same

One dollar of revenue does not always equal another dollar of revenue

A.T. Gimbel
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January 17, 2023

After one of my recent posts, I got a great question asking why investors ignore certain companies with revenue (thank you Eli). I have written before on different types of revenue models, but based on that question here are a few reasons why not all revenue is the same.

Recurring nature

The best kind of revenue is recurring (i.e. $X per month or year). This revenue can grow on its own (i.e. adding more users/upsells), often has a value proposition that shows the solution is part of the workflow, is predictable for cash flow, and has higher retention. On the opposite end of the spectrum, one-time revenue sales have to be re-sold each year, have higher attrition, less predictability, etc. So $1M in annual recurring revenue is far better than $1M in one-time sales.

Margin profile

Some products (i.e. data/software) have really high (>80% gross margins), so that dollar of revenue brings a lot to the bottom line. Other products (i.e. physical product or service) have much lower gross margins and may only drop 20-30% to the bottom line. So naturally, a dollar of higher margin revenue is better than a dollar of lower margin revenue.

Growth rate

This one is simple and obvious, but two companies both have $1M in revenue. If one was 5% growth from last year and the other grew 100% from last year, the higher growth rate is often more attractive and indicative of future growth.

Customers/use cases

This one is a little more complex but important. One key dimension for early stage startups is use case: how many different use cases/problems make up the revenue? This is an early indication of product-market fit. Focused use cases and value props are better than no consistency in customers and use cases. Another dimension is friendlies: how were the new customers acquired? If cold outreach and a sales process were in play, that can be more indicative of authentic demand than just five customers that were all friends from previous relationships. A third dimension is concentration: $1M of revenue concentrated in one customer is a lot riskier than $1M of revenue spread across many customers.

There are many additional nuances, but these are a few of the key reasons that $1 of revenue is not necessarily the same as another $1 of revenue.

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